Trying to learn economics by forgetting JVP ideology
The episode last month of the JVP accusing the Central Bank of manipulating the exchange rate, their listening to the Central Bank explanation of how the exchange rate is determined and the JVPs retraction, are all indicative of the JVPs ignorance of economics, especially fiscal and monetary policy, their willingness to learn and a capacity, limited though it may be, to shed ideological positions they have held for a long time. The JVP is no doubt facing the pinch of realism.

Their outdated ideological positions don't square with the realities they face. So there are new efforts to understand economics in the global context and the realities of the Sri Lankan economic context. This is a difficult task when one is burdened with an intellectual baggage from their youth. Nevertheless it is encouraging that they are trying. Key members of the JVP have met with intellectuals, especially economists, to try and understand the other side of economic thinking. They have had discussions for sometime with the Central Bank, university lecturers and most recently with the World Bank officers in Colombo. These are indeed good signs for the future of both democracy and economic development.

One of the stumbling blocks has been their patriotic idealism. They want their motherland to produce everything and reduce imports as much as possible. Sounds good. Yet it is impractical and could be bad economics.

The other dimension of their thinking is that modern technology is not needed and that we can use labour instead. Again it is an idealism that is impractical for many reasons. Another aspect of their thinking that impedes their economic policy thinking is their heightened role for agriculture and a lesser role for industry or services. There is some evidence that they may deviate from these stances somewhat. For instance recently they spoke of industry too having a role to play. They have spoken of the need for both local and foreign investors.

The JVP should realise that Sri Lanka is a small country with limited land resources. Consequently in many cases there is no possibility of the country producing all its food needs. In fact producing several commodities, for example sugar, is so much more costly than it is to import. The economics of large scale farming of a crop like sugar and the fact that beet sugar production is cheaper than cane sugar accounts for this.

This logic may apply to milk production as well. Even in the case of rice, though our paddy yields are high the cost of production is higher than elsewhere in the region or even internationally. There can be an argument for increasing production of many commodities but to aim at producing all our needs or beyond a certain level of production could be economically unsound. So self-sufficiency at any cost is a flaw in economic thinking.

The JVP requires understanding the concept of comparative advantage. The country would benefit most by producing the goods and services they are most advantaged in producing and in exporting these and importing those goods that are more cheaply produced abroad. Of course this theory should not be applied blindly as indeed a set of World Bank economists did not so long ago when equally foolishly they suggested that we should give up producing paddy, as we did not have a comparative advantage in it.

There are a number of other issues that have to be brought into the equation. Among these are questions of national security and vulnerability of country at a time of war or regional wars. There is also a need to look at alternate opportunities of employment and income generating activities. What may make sense in the long run may not be feasible in the short run.

These latter aspects the JVP understands, but the earlier issue appears lost on them. Theirs is an idealistic approach to agriculture. The effort to repair a thousand tanks by use of labour alone is a clear example. This is not feasible for many reasons. The required amount of labour would not be forthcoming, it would be too tedious and a time consuming effort and ultimately it would be only partly implemented. The objective and the intentions are good but the strategy is faulty.

No doubt agriculture has an important role to play. Yet we cannot exaggerate it. Over the years its importance has diminished partly owing to diversification into other activities and partly due to its slow growth. Certainly the institutional rigidities that constrain productivity must be removed to enable a more productive agriculture, but it cannot take the place of industry and services that require being developed to transform the economy.

The JVP has been basically antagonistic to foreign borrowing and multilateral agencies. There can be no doubt that the multilateral agencies so often dictate policies that are inappropriate and even politically and socially disastrous. Yet there is no way in which we can shed our dependence on them. The JVP must indeed be congratulated on their effort to explain their position to the World Bank. They got a sympathetic hearing and some of their positions were appreciated. Perhaps the hearts of the World Bank officials melted a little. The JVP may have even succeeded in modifying some World Bank stances. Yet the need to understand the thinking of these institutions and make some compromises is inevitable.

Lastly, let us deal with the need for foreign investment and aid. Beyond any doubt the country requires to double the amount of foreign investment as the domestic savings-investment gap is of a magnitude that cannot ensure a 7 to 10 per cent growth. Foreign direct investment is particularly important, as such investment not only brings in capital, but also the know-how, superior management skills and marketing channels.

Foreign investors require a more certain investment climate and the rumblings of the JVP that results in considerable uncertainty in economic policy is hardly conducive. The JVP's interest in learning economics the right way must be appreciated and supported.

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